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Contract Law: Rescission Anyone?

When a client has an issue with a contract he/she most certainly looks to whether the issues caused any damages.  I would agree that this is an automatic first step in the conceptual process involved in creating a remedy to address a client’s needs.  But what about the case where you simply want the contract to be treated as a nullity and be restored to where you were before the contract was consummated.  In that situation you are asking either the other party to the contract or the court to rescind the contract.

There are essentially two types of rescission albeit there is some overlap in respect of the grounds which would justify such rescission.  The first (i.e. common-law rescission) does not require court intervention.  This occurs where the contract on its face has a clause which makes it voidable at one of the party’s option.  So what do you do?  You carefully review the clause, and fulfil the operative steps required to “rescind” the contract.  Other than where the contract specifically provides for it, this “common law” rescission applies where an infant has entered into a contract which is not binding on him/her; fraud; and where a contract has been procured by duress.  Here, the party also has the right to seek other common law remedies.

The second type of rescission is “equitable rescission” and is wider in scope than its common law counterpart.  In this second class, a party asks the court for relief from a transaction where it would be inequitable to require the party to be bound.  That’s it.  That’s the test.  You bring your proceeding and the court of equity upon hearing the evidence does what is “practically just”.   In this situation, the court essentially applies the rules of equity and determines that a contract should not be allowed to stand and that it should be annulled.  Like the situation with common law rescission, the power of a court to rescind a contract on equitable grounds occurs in three cases.  First, where the contract resulted from some fraud and as a result, the defrauded party mistakenly entered into the contract; second, where the mistake was an innocent, non-fraudulent misrepresentation, and third where the contract was obtained by some unconscionable acts which makes the entire agreement questionable.

The effect of an equitable rescission is quite dramatic.  If rescission is granted, the entire contract is treated as a nullity.  In the course of making that decision, the court also has the power to make certain adjustments involving some compensation for the use of the property prior to the granting of the rescission.  As an example, if John Smith purchased a widget from Sally Sunders for $100 and it was determined that such procurement was induced by unconscionable behaviour, the court may order the return of the widget to Sally Sunders and the corresponding payment returned to John Smith.  But what if the widget lost value in the interim or, what if John Smith used the widget for a period of time, thereby deriving some value from it?  In such a case a court may in fact order Sally Sunders to return only a portion of the money to reflect the use of the Widget by John Smith.

It also goes without saying that there are some equitable defences available to Sally Sunders, but that my dear reader is a blog topic unto its own.  I shall examine certain equitable defences in my next post.